The scariest housing bubble

China’s ‘ghost cities’ are raising fears of an epic crash with global consequences

by Chris Sorensen

The scariest housing bubble

Stringer/Reuters

In Ordos, a city of 1.5 million in Inner Mongolia, there sits a mostly vacant district that was built to house and service another one million people, complete with huge public squares and museums. In Dongguan, more than 2,500 km to the south, the sprawling New South China Mall opened in 2005 to host an expected 70,000 shoppers each day, but remains mostly empty. Other so-called “ghost cities” are strewn across China.

When China’s economy was flying, such spending was little more than a curiosity, an inevitable by-product of a rapidly urbanizing country of 1.3 billion where construction investment accounts for nearly half of GDP. But these days, economic growth is slowing—the government is targeting 7.5 per cent this year, compared to more than nine per cent a few years ago—and all those empty apartments are beginning to look more sinister. Are they evidence of an epic real estate bubble waiting to burst, with global consequences, or just another relatively harmless sideshow of China’s centrally managed economy?

There’s little doubt that Beijing’s policy-makers are wrestling with an overheated property market. In a bid to clamp down on speculators who are driving up prices on units they don’t plan to live in, the government recently unveiled plans to introduce a new 20 per cent tax on profits from home sales, while raising down-payment requirements in certain cities. That, in turn, sparked a buying frenzy ahead of the new rules. In Beijing, home sales spiked 280 per cent during the first week of March, compared to the same period a year earlier. Adding fuel to the fire was a recent 60 Minutes report in which a reporter toured vacant development projects and interviewed Wang Shi, the chairman of Vanke, one of China’s biggest real estate developers. Wang said he believes China is currently in the grips of a real estate bubble and its burst would trigger an Arab Spring-like uprising. The stocks of several Chinese developers plummeted soon after the program aired.

The prospect of a housing downturn in China is not to be taken lightly. The sector has been called one of the most important in the world, influencing global prices for everything from lumber to iron ore. But experts say it’s a mistake to confuse a handful of vacant developments with the property market as whole. While empty buildings are a sure sign of overcapacity in some areas (some reports claim as many as 64 million apartments are unoccupied), big cities like Beijing, Shanghai and Shenzen continue to face a chronic shortage of housing, keeping prices up. It’s essentially the tale of two housing markets: China’s thriving coastal cities and sleepier inland centres the government is keen to develop.

David Cohen, a forestry professor at the University of British Columbia, is one of many who believe a U.S.-like housing crash is extremely unlikely in China, despite reports that overbuilding accounts for as much as 10 per cent of GDP. “We’ve already seen a number of moves over the last three years to restrict construction of mid- to high-rise apartments, which tend to be the ones to be flipped,” he says, adding that Beijing’s technocrats have so far shown an uncanny ability to use the levers of power to prevent the economy from running off the rails. The most recent example is an $800-billion program to build 36 million units of affordable housing by 2015. The program aims to maintain China’s all-important economic growth even as efforts to curb speculative property purchases begin to bite. It’s also designed to head off any social unrest brought on by high housing prices. Another safety valve is built in: the huge number of Chinese who continue to migrate from rural areas into cities. “The underlying demand for urban housing in China is very strong, and that demand will kick in relatively quickly to provide a floor to any downturn,” says Yuen Pau Woo, the CEO of the Asia Pacific Foundation of Canada.

Aprodicio Laquian, a professor emeritus of community and regional planning at UBC, recalls visiting similar empty apartment buildings in Guangzhou more than a decade ago—all of which are now fully occupied. “The Chinese use urbanization as a developing tool,” he says. “They use it as a way to move people closer to jobs. But in order to convince people to move to some of these areas, you have to build everything first.”

Some even argue that China’s forest of vacant apartments and office towers are actually lesser evils in a country where investment, not consumption, drives growth. A far worse outcome, argues Jonathan Anderson, a partner at Emerging Advisors Group, would have been to pour the money into manufacturing and services, which would create excess capacity in the economy, thus driving down corporate profits and workers’ wages. An empty city or two, by contrast, doesn’t really harm the country as a whole. “If you’re going to waste capital,” Anderson writes in a recent report, “best to waste it completely, where it will do the least damage to everyone else.”




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The scariest housing bubble

  1. All that the Peoples Republic of China has to do to fill up these ghost cities is to relocate all those people confined in forced labor camps and those whose homes and lands have been confiscated by the government into them. China is a joke. Pollution. Corruption. Political suppression.

    • Actually, as this article actually makes quite clear: China is not the joke, and one could argue their economic policies are way smarter than America’s.
      China is building cities for it’s peasants.. America has millions of forclosed homes, and millions of people who cannot get the credit to buy them…
      See the difference?

      • antidrone is an idiot. These massive cities, the size of New York, are EMPTY. The peasants are moved off of the land on which they are built. No peasant lives in any of these cities.

      • They force peasants off the land to make room for more of these housing projects. These houses are definitely not for the peasants.

  2. vlado

  3. Whoever talked a long time ago about a yellow danger for western civilization, was right. Politicians as well as oligarchy completely ignored it. Who seeds wind, will harvest the storm.

    • Ahhh the ‘yellow peril’ racism again.

      Without China….there wouldn’t be any ‘western civilization’

      • You tell me why, I will appreciate it greatly.
        V.

        • Well, I doubt you’ll appreciate it….but here you go

          ‘China has been the source of many inventions, including the Four Great Inventions: papermaking, the compass, gunpowder, and printing (both woodblock and movable type). The list below contains these and other inventions.’

          http://en.wikipedia.org/wiki/List_of_Chinese_inventions

          • Similar goes for Egypt, Persia and other civilization … but they are no danger for the West as China might be now… the time will show. And where would be China without western investments starting 20 or 30 years ago?

          • We are simply building on the accomplishments that have come before us….we’ve improved, not invented.

            Where would China be if we hadn’t torn the place apart for a hundred years, and intoduced Opium?

          • Torn the place apart, wtf are you talking about. Do you read. Without the US china would speakJapanese, and the chinese introduced opium to the west. I respect chinese history and its people, but there politicians and industry are ruining its environment and stifeling the growth of millions of people.

          • Not my fault if you know nothing about history. Until about 1500 CE China had the biggest GDP in the world. Then they got a couple of bad emperors and went downhill. The west invaded China m’dear and the Brits introduced Opium to China. There were the Opium wars. The Chinese eventually rallied and fought back and tossed the ‘west’ ( UK/US) out. They’ve been rebuilding ever since, and now they are about to overtake us.

          • opium were sold from the west to Asia, these British man might be one of your ancestor that became so rich even til today and only if u knew what your ancestor did, Chinese seen all of these around the world, look at the museum world wide and you might be surprised by what kind of stuffs that been stolen across the sea from the very heart of China, its is about time now, about time to review the truth and the west are still barking due to what? You take your look at your history and you will find that how many civilization left that havnt been invaded by the U.S for whatever reason it was. You cant just destroy or steal from someone and expect that they would listen to you lie after you rules them, even the Japanese are as ashamed and trying to changed the history text book themselves, also there were another point is that western investments are pour in their money because of greed, greed for the labors, in turn that bring economic destruction back to these greedy man and its systems, its just the way it is, nations rise and fall along the history, even egypt and china were once an advanced civilizations, i hated history, it cant proof or change much about anythings, everyone got their own view point regardless of times and personal experience, once war would clear much and nothings left in text but hatre so i hope u make your peace and befriend with each other for goods.

          • I appreciated that if only because I would have guessed Guttenberg and you never know when that trivia will come in handy. So how were Chinese inventions introduced to the West? Without looking it up, I am going to guess Marco Polo brought these things back to Rome.

          • Well they figure now that Polo never made it to China, but I’m sure there were lots of other travellers that did. The Chinese were the first to use cannon, so you can bet that news travelled fast!

    • So Chinese success = dangerous?

      • How is an empty city “successful”?

        • They’re not

          The $7.3 Trillion GDP is though

  4. How do they make any money with all these empty units ?

      • The Chinese state achieves its objectives

      • you mean pray right

    • They don’t. That’s the problem. Ghost cities are funded nearly entirely by the state. They have, at most, 23% occupancy. The government isn’t just building houses, but office buildings and huge malls, all of which are empty.

      Few in China can afford the houses and the apartments which cost upwards of $300,000.

      • They also have a university built for 1.3 million stundents, current enrollment 13,000 why do they have to come here for?

  5. besides they are evil socialists.. worst case scenario, I’d just make the units free…
    excellent dichotomy between the US and China, btw

  6. 10 years ago he is a strong young man. Now, he takes drugs and is put into jail. How could UBC professors make such stupid comments?

    10 years ago, the world economy was much better and there were no European crisis.

    10 years ago, China could still rely on its “cheap” exports for economy growth.

    10 years ago, the U.S. economy was in an up trend after the internet bubble burst.

    10 years ago, the housing prices in China were much more reasonable.

    10 years ago, overbuilding was only a problem in big cities in China.

    10 years ago, the Chinese economy was growing at 11% per annum.

    10 years ago, the shadowing banking industry in China was 300% smaller than its current size.

    10 years ago, the Ponzi game just started.

    10 years ago, … you name it.

  7. WHO believes that China can grow at 7% forever…..every 10 years TWICE the inputs..oil, electricity, metals, TWICE the outputs they MUST sell to other nations, TWICE the industrial waste and pollution? What do people not understand about EXPONENTIAL GROWTH?

  8. Look like they could be loaded on a barge and shipped to Canada for affordable housing

    • LOL why would they want to go Canada. Who gives a shit about Canada

  9. For large population countries these types of constructions
    are suitable in rural areas. There are such small and common houses are
    constructed for slum development in India.
    http://www.springfieldshelters.com

  10. The CCP says it wants to cool property prices but none of its measures have been successful thus far. This gives the impression that property prices can only go up. In reality if the CCP really wants to control prices, it just need to introduce a property tax and we see all the empty apartments coming back into the supply side either as rental homes or resale flats. Only fools will enter the market at this stage and there is quite a few around .

    • Looks like it’s exactly what happen now in most of cities of China. No one, or say 99% of people doesn’t seem to believe the price of property could even decrease, thus a recently-announced property tax makes basically no difference in the housing market, I mean, period.

  11. I’m not sure where you’re getting your information, but good topic. I needs to spend some time learning more or understanding more. Thanks for magnificent information I was looking for this info for my mission.

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